The retail industry has been struggling, but that is probably no surprise to anyone. And those businesses that have managed to survive have still had to undergo some kind of transformation. Even long-time success stories like the Gap have had to make some tough choices, and this week they have announced the decision to split off Old Navy to make it a publicly traded company.
You may not be aware that Gap is actually a house of brands that includes all Gap subsidiaries (Gap baby, etc) as well as Old Navy and Banana Republic. Unfortunately, Gap and Banana Republic are relics in today’s apparel industry and the parent company needs to do something to remain relevant and profitable. With that, then, Old Navy—who continues to do well—will be split off and the remaining businesses—which also includes Intermix, Hill City, and Athleta—will live on as independent “NewCo” companies.
Gap Chairman Robert Fisher (who is the son of company founders) comments, “Following a comprehensive review by the Gap Inc. Board of Directors, it’s clear that Old Navy’s business model and customers have increasingly diverged from our specialty brands over time, and each company now requires a different strategy to thrive moving forward.”
He goes on to specify, “We determined that pursuing a separation is the most compelling path forward for our brands.”
This, he says, will create two separate companies with two distinct financial profiles that are tailored to their operational priorities and “unique capital allocation strategies.”
Old Navy posted a 3 percent increase in same-store sales last year (the best among the brands), pulling in $7.8 billion in sales last year. That is up from $7.3 billion from the year prior. By comparison, the other “NewCo” brands raked in only $8.7 billion collectivelylast year.
In conclusion, Gap CEO Art Peck notes, “In Old Navy, we have one of the fastest growing apparel retailers in the United States with the winning business model and an impressive runway for future growth, including capitalizing on opportunities like opening new stores and expanding into new product categories.” In a conference call with investors, he adds that Gap will close 230 stores over the next two years while Old Navy, as a “stand-alone company will have approximately $8 billion in annual revenue,” which will allow them to capitalize on scale and broaden consumer awareness to take advantage of its unique position in the market today.